Destruction of Cyprus Economy Proceeding Ahead of Schedule

When I first heard about the Cyprus ritual execution bailout, I had thought that the widespread predictions that the island nation’s economy would contract by 20% to 30% over the next two years were off base.

I thought it would happen much faster, on the order of two to three months. An estimated 45% (mind you, 45%!) of the economy is banking (clarification: including services to international banking clients, such as legal and accounting), and almost all of that international banking. So if you generously assume 200% of the 900% of GDP was bona fide domestic assets (remember you have a lot of retirees), the other 7/9 goes poof. And that’s before you get to the fact that a lot of the services provided to foreign customers (the higher-end accounting and legal services) will have no future in a purely domestic banking business. So assume 90% of that 45% disappears in short order.

That much of an economy vaporizing is a state change. It’s not clear how Cyprus can regroup or recover even if the surplus international banking types could decamp. How do natives, whose money is presumably entirely in Cyprus (assuming it was not devastated by the hits to depositors at Laiki and Bank of Cyprus) emigrate with capital controls? How can they get their money out to make a new start somewhere else, if that’s their inclination? Again, while the Cypriot government initially said that capital controls would only be in place a matter of day, no expert believes that. They anticipate they’ll be in place for years to keep the remaining deposits from vanishing.

I did not make predict the speed of decline because the my assessment seemed too extreme. Surely I was missing something. Even though it looked to me as if Germany had done the economic equivalent of nuking half the island, and there would be knock-on effects from that level of devastation, I figured I had to be missing something in terms of how quickly the bad effects would take hold.

Well, maybe not. Recall that we predicted that depositors of over €100,000 in Laiki, the number two bank, would be wiped out. Reuters tells us that depositors with over €100,000 in the biggest bank, Bank of Cyprus, will have no liquidity (see boldface):

Big depositors in Cyprus’s largest bank stand to lose far more than initially feared under a European Union rescue package to save the island from bankruptcy, a source with direct knowledge of the terms said on Friday.

Under conditions expected to be announced on Saturday, depositors in Bank of Cyprus will get shares in the bank worth 37.5 percent of their deposits over 100,000 euros, the source told Reuters, while the rest of their deposits may never be paid back

Officials had previously spoken of a loss to big depositors of 30 to 40 percent….

At Bank of Cyprus, about 22.5 percent of deposits over 100,000 euros will attract no interest, the source said. The remaining 40 percent will continue to attract interest, but will not be repaid unless the bank does well.


The over €100,000 deposits in Laiki are gone.

At the Bank of Cyprus:

The 37.5% of >€100,000 deposits being converted to shares is a seriously out of the money option. What would you value that at? Not much.

40% won’t be accessible even under a best case scenario for years. The duration of time deposits is to be determined, and any returns depends on the bank’s performance. And of course, depositors may not get it all back.

The remaining 22.5% may or may not be available in two to three months.

The New York Times’ story is broadly consistent with the Reuters account, indicating that over 60% of deposits at the Bank of Cyprus could be toast:

Under the terms of the transaction, large depositors would have 77.5 percent of their savings turned into different forms of equity, with the rest remaining as a frozen, non-interest-bearing deposit that they would be able to access in the future.

If the bank does well, depositors would be able to sell their stock. But even in the best case, in which the bank thrives on the back of a quickly recovering economy — a long shot most economists believe — the loss is likely to exceed 60 percent and could well be much more than that.

Lawyers and bankers who have analyzed the transaction believe the ultimate loss to the depositor could be anywhere between 60 and 77.5 percent.

Notice that the Times doesn’t buy the effort to pass off the “term deposit” that you maybe never see again and whose payout depends on performance as anything other than equity. It is silent on what happens to the remaining 22.5%. It does point out that nothing has been announced and final terms may therefore differ from the rumors.

Now remember, Laiki and Bank of Cyprus were the core of the payments system in Cyprus. And it would be very difficult for a business of meaningful size not to have over €100,000 in deposits. If you freeze a significant majority of the commercial balances, how can you operate? How can these businesses even survive and pay each other? By e-mail, Antonis Polemitis of Ledra Capital teased out the implications:

If the Reuters story is correct, for the purposes of liquidity on Tuesday morning, that is a 100% haircut.

If that is what they do, I am not sure how Cyprus can engage in economic activity on Tuesday without going to barter or scrips.

I mean, that basically will mean 100% of the large deposits (all the business accounts) at Laiki and BoC are lost or not available as of next week. The Laiki wipe out may have been survivable. If you wipe (for liquidity purposes at least), both Laiki and BoC, then we are not talking about whether or not GDP drops X%, we are talking about ‘how do you actually engage in commerce?’

If they do this, there is little chance it can last more than a month — the economy will simply fail at even basic functions…

And if the plan has been accurately reported and plays out as Polemitis fears, it will undermine the “Cyprus is a special case” narrative. This Eurozone fiasco is making Geithner look good. The former Treasury secretary used the need to keep the confidence fairy alive as the excuse for any and every sop to the banks, from coddling miscreant executives to foaming the runway with mortgage borrowers to stealth bailouts. But the Eurocrats have completely ignored the impact of undermining confidence in the banking system. The fact that Cyprus has a decent-sized population of English retirees means that the British media will report on the Cyprus meltdown, which will be a stark contrast with Greece, where the economic devastation has not gotten the coverage it warrants. Grim accounts of the destruction wrought by the tender ministrations of the Troika should strengthen the position of the growing Euroskeptic sentiment in Italy, borne out by the success of Berlusconi and Grillo in the recent elections. Playing into the hands of Italian refuseniks should be the last thing Brussels and Berlin want. The cost of getting tough with Cyprus is likely to be far greater than they anticipate.

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  1. Gerard Pierce

    Who controls the computer systems that keep track of account balances in Cypris (and the rest of the EU)?

    As I remember it, in the US, back around 1980 or so, a high percentage of smaller banks had turned their demand deposit accounting over to a company owned by CitiCorp. I have no idea how it is handled currently. I assume the Fedwire and CHIPS systems are still pretty much unchanged.

    Today, I’m curious how much control a European government has over its own banks.

    The point of the questionis: what happens if one European Government tells the troika to take a flying leap.

    Who gets to push a button and disconnect that country’s banks from the world economy. The related question is whether the countries ATM machines are controlled internally or externally (Are the computer systems located in the country, or in Brussels or Frankfurt).

    Considering the insanity currently going on, this may be the most important economic question today.

    1. the Northern Crown

      EU government is part of troika (EU [Comission, not elected, they elect themeself]-IMF-ECB).

      All euro countries are part of Target 2 which is controlled by ECB. They are part of this target 2 by their national payment system, which is planned to be replace with Target 3 in some near future.

      So probably its Cyprus central bank who holds most of the strings at this moment.

      1. steak

        “Central Banks have a centralised data warehouse in TARGET2 that potentially could generate standard reports on e.g. payments, liquidity and intraday credit indicators” – Feb 2013 meeting notes for the Eurosystem Working Group on TARGET2, discussing intraday liquidity indicators.

        It seems there is a button that could be pushed whereby bank of Cyprus (or any other EU central bank) gets the boot from the global financial system. Though there are always swap lines with the fed.

    2. Veri

      ATMs would be controlled locally as determined by their physical location. Software patch or new code. Of greater concern would be IBAN codes. Invalidate the IBAN codes for Cypriot banks and cut them off from financial institutions from the outside.

      As for capital fleeing to Russia? London. The choice of destination for money and former dicators and Oligarchs alike.

  2. GDufey

    The computers are In Nicosia, the ATM’s are controlled by each individual bank.
    The ‘greater conspiracy theory’ will do little to shed light on the future.
    C banks will simply be more careful in the future and buy fewer risky assets (high yielding Greek bonds) to pay high interest rates on EUR deposits.
    Capital fleeing to where? Back to Russia? How many local business firm have deposits much in excess of EU 100K for running day to day liquidity?
    The EUR 10 billion out of EU taxpayers pockets plus a contribution by large depositors (who enjoyed good interest when others got 1% or less for the same EURO) will go a long way to ‘refloat’ the small economy, with a somewhat smaller banking system, many features of which are still attractive to intl. investors going forward.

    1. David Petraitis

      A commercial balance of over 100k is not a big deal for hotels, large department stores, grocery stores, hospitals… you name it. Hospitals in Greece can’t get supplies now. I wonder what the Cypriots have been doing for the past two weeks?…!
      Presumably Cyprus-to-Cyprus credit/debit card transactions are still being cleared. Remember NO Checks are being cleared. Anyone such as a hotel that needs to buy even toilet paper off-island will be shit-outta-luck literally within days.
      As Yves points out we will see the rapid rise of barter and script, and where that happens the tax income falters as well, deepening the spiral down in the national account. THe grey market will increase, wages taxes, government pensions, will be lower. the island’s economy is toast.
      Now is the time to book a summer vacation in Cyprus!

      1. 102010

        “Now is the time to book a summer vacation in Cyprus!”

        can’t tell if that’s supposed to be sarcasm or seriousness….but the problem with all service-based economies is that they are energy/petroleum-based.

        No hard currency = no energy imports = less than optimal time to be a tourist.

    2. Mackey Chandler

      Refloat how GDufey? How do you imagine the new funds will make their way back into the community to buy the things businesses need? Are these recapitalized banks suddenly going to flood the island with loans for the people who just had their money stolen?

    1. Yves Smith Post author

      There is a huge infrastructure related to international banking that is not on the payroll of banks. These are the lawyers and accountants that do the international deal structuring and documentation for the companies that do business in Cyprus. As I’ve indicated in past posts, the overwhelming majority of money that goes through Cyprus is foreign direct investment to Russia. That is in turn a combination of non-Russian companies investing in Russia via Cyprus, and Russian companies round tripping through Cyprus, preferring to invest in Russian companies/deals via Cyprus because the legal system is cleaner and more reliable than in Russia.

      Think of the time and effort involved in setting up corporations and preparing complex contracts relative to the fees earned in banking (wire transfers, account opening/maintenance fees, interest spreads). The % of GDP involved in the service provision relative to international banking is a big multiple of the formal banking sector.

  3. The Dork of Cork.

    One can clearly see how this works if you look at Global trade patterns in real goods.

    The Anglo countries & indeed France to a lesser extent wish that their industrial plantations in Germany & China remain.

    To sustain this in Europe they need all remaining raw materials to flow North into Germany.
    Capital controls within a currency union is not a nationalistic thingy………
    Its a means of reduction.
    You reduce the island populations claims on the remaining external wealth , which will reduce the local resource burn.
    That surplus is transferred to Germany where they will continue to make products for the US ,UK & France.

    Germany is very much the junior partner in all this.
    They are along with the plan so that their local fat cats can stay in business.

    1. Mark P.

      To consider an entity like Deutsche Bank as being any kind of “junior partner” is naive.

      1. The Dork of Cork.

        These banks are global in nature.
        At most they have a base of operations (nest) which they try not to shit in.
        I was thinking of the more local German Industrial interests rather then the international financial sector.

        Unlike the UK local Industrial interests in Germany still have considerable power.

    2. from Mexico

      The Dork of Cork.says:

      That surplus is transferred to Germany where they will continue to make products for the US ,UK & France.

      Germany is very much the junior partner in all this.


      The Anglo-Americans sit at the top of the feeding chain, and Germany and China have become the US’s sweat shops.

      The latest twist of empire entails not just exploiting weaker countries’ natural resources, but their labor resources as well.

      1. from Mexico

        And I think the brutal and unmerciful way in which Cyprus was treated was for the most part a demonstration of what has become known as the imperialist “mafia doctrine.”

        Cyprus was used as an example of what happens to those who consort with the enemy, in this case Russia. One has to keep in mind what Veblen wrote of the Treaty of Versailles almost 100 years ago, that “the present economic and political order rests on absentee ownership,” and that the “imperialist policies of the Great Powers, including America, also look to the maintenance and extension of absentee ownership as the major and abiding purpose of all their political traffic.” Russia, then as now, represents the biggest threat to Anglo-America’s “maintenance and extension of absentee ownership.” A Russian-German alliance would fire what very well could be a fatal broadside into Anglo-American world hegemony.

        Cyprus is a Grenada redux, as Michael Parenti explains here:

        1. Heretic

          Maybe there is a simpler explanation. There other European banks want more work and profit (extraction ) opportunity for themselves. A simple to gain this is to destroy your competitors. Cypriot was weak and they became vulnerable, so the troika used the opportunity to euthanize a huge section of Cypryses’ financial industry.

          Of course there will be ramifications. The any company that had die their banking through Cyprus is effectively screwed. And the rich Russians are not patsies; they know that this is an bullshit and they are going to retaliate in some unpleasant fashion.

          1. from Mexico

            Maybe the Russians already are retaliating.

            Give arrogance, hubris and self-righteous piety enough rope, and they tend to hang themselves.

            The Russians may have learned their lesson in Afghanistan, and are now sitting back and watching the enemy self-destruct.

  4. ambrit

    With the Cypriot economy essentially destroyed, as the gentleman from Ledra Capital observes, one major basic economic activity that collapses is the Cypriot tax system. Has anyone over there thought about how the country even functions after the dust settles? Now, this is the southern part of the island. What’s happening in the Turkish north? Are the people there getting ready to ‘export’ Turkish Lira to their embattled southern cousins?
    It makes the BRICS scheme to start some sort of alternative reserve currency suddenly a viable option. Now, if Turkey could get in on the BRICS International Currency and export it to Cyprus as a whole…

  5. The Dork of Cork.

    Just to add global trade patterns are clearly unsustainable but if you look at the UK (the most extreme example) it neither has the machine or human resources to supply its still growing population.
    Its coal miners are gone , its northern industrial towns & factory workers are no more , its oil & gas is mostly gone , its domestic nuclear industry is no more………….

    It has a service industry but this service industry if you could call it that just recycles the physical wealth from abroad.

    ONS has just discontinued a publication which gives it physical trade in detail.
    But you could see how Albion was hooking into German real goods production at the expense of income from the rest of the EU.

    Given the nature of Anglo economics they must burn through their system to survive another day.

  6. The Dork of Cork.

    Manchester economics only works when you have a larger hinterland from which to extract.

    The UK has a long history of destroying its internal redundancy so as to sustain “growth”

    This is the basis of liberal economics.

    The European countries with the biggest resource declines are one with heavy British influence.

    Its as if the British made a deal with German industrialists .
    We will burn down those island fiefdoms if you keep supplying us with industrial goods.

    1. from Mexico

      The Dork of Cork said:

      The UK has a long history of destroying its internal redundancy so as to sustain “growth”…

      The UK has a long history of deindustrializing in order to sustain empire. It’s the fate of all economies that rely disproportionately on conquest and plunder.

      As Bernard Porter wrote in Britain, Europe, and the World, 1850-1982: Delusions of Grandeur:

      the only way Britain could adequatley safeguard her vital national interests against external dangers was by undermining those same interests from inside. It was like a man threatened by burglary having to sell his valuables to buy protection against the burglar… There was no way through this paradox, and no way, therefore, that British foreign policy from the 1890s on could possibly “succeed.”

      It’s a pattern that runs though the world’s greatest post-Renaissance empires like a thread. For Spain, Holland, Britain, and now the United States, the decision at some point is always made to sacrifice industrial might for military and financial might, or to put it more bluntly, for decadence. As the Mexican writer Carlos Fuentes put it:

      Spain also became the first example of an anomaly that the United States runs the risk of repeating as our own century ends: that of being a poor empire, debt-ridden, incapable of solving its internal problems while insistent on playing an imperial role overseas, but begging alms from other, surplus-wealthy nations in order to finance its expensive role as a world policeman.


      The Spanish writer Fernando Diaz Plaja finds a provacative parallel in this situation between Spain and the United States. Both, at the height of their influence, joined military and economic force to an obsessive belief in their own moral justification. Whether against Protestantism, in the case of Spain, or against communism, in the case of the United States, the nation overextended its power, postponed solving internal problems, and sacrificed generations. And even when the enemy ceased to be menancing, the desire to use power persisted, inebriating, addictive.

      Plaja’s point is lent credence by looking at just how quickly America’s leaders invented the threat of terrorism after communism had ceased to be menacing.

      1. Bill Jarett

        The fraud of “free” trade destroyed the British Empire and is killing what’s left of the American Empire. The USA runs a yearly -$788 BILLION trade deficit because of the fraud of “free” trade- no nation can survive that.

  7. Milton Arbogast

    Most of the really bad stuff that happens in the US is the result of “States’ Rights”.

    That is not universally true (depending on your point of view), because the Defense of Marriage Act is going to be overturned on the basis of “States’ Rights”, but in general states with low populations and a bent toward slavery have managed to wag the dog for a long time.

    Well. Europe is “States’ Rights” writ large. And it is not pretty, and I do wonder how long it will last. At least the residents of the 50 United States sort of speak the same language. Look at the problems the “Sleeping Giant to the North” (that would be Canada) has just because they have a minority Francophone population.

    Good night sweet prince, and flights of angels sing thee to thy rest.

    1. from Mexico

      Milton Arbogast says:

      Most of the really bad stuff that happens in the US is the result of “States’ Rights”.


      The division of power between the states and the central government, as well as between the three branches of government — executive, legislative, and judiciary — was the solution Madison and the other founding fathers crafted to solve what was known as “the democratic riddle.” Wherever “a majority are united by a common interest or passion,” Madison concluded, “the rights of the minority are in danger.”

      Madison was undoubtedly concerned in preserving the rights of some (mostly religious, but certainly not black) cultural minorities, but he seems to have been even more concerned with preserving the rights of economic minorities: the rich.

      The proper remedy to the democratic riddle, Madison said, was to “enlarge the sphere” of republican government

      and thereby divide the community into so great a number of interests and parties that, in the first place, a majority will not be likely at the same moment to have a common interest separate from that of the whole or of the minority, and in the second place, that in case they should have such an interest, they may not be apt to unite in the pursuit of it.

      A remarkable reversal of the standard eighteenth-century wisdom, the conept that private rights might be rendered more secure in an enlarged republic was the major premise of the arguments by which the great Virginian led the Constitutional Convention to a thorough reconsideration of the proper structure of a liberal republic. Linked with the idea that a majority can be a faction — “a number of citizens…who are united and actuated by some common impulse of passion, or of interest, adverse to the rights of other citizens” — the case for an extension of the sphere of republican government became the centerpiece of his defense of the completed Constitution.

      Have you not noticed that many of the challenges to the financial services’ juggernaut have come from the states? Your statement is not only theoretically flawed, but empirically flawed as well.

      1. David Petraitis


        Like the Madison quote. The part about getting the majority not to unite around their common interests is straight from the oligarch’s playbook. Priceless, as they say.


  8. Jose G.

    This scenario of economic devastation seems to be one more reason for Cyprus to return to the Pound.

    And the main purpose wouldn’t just be regaining the right to depreciate the currency thus boosting exports – especially of tourism services.

    While no doubt a relevant matter, this would pale besides the much more important possibility of ordering the Cypriot National Central Bank to inject Pound reserves in the commercial banks in order to preserve ALL deposits (now denominated in Cypriot Pounds) and the payments and clearing system.

    This might risk some inflation and significant depreciation, yes. But under the present extreme circumstances it would be tantamount to delivering the gold rings in order to preserve the fingers.

    Recapturing monetary sovereignty is not only about the right to have an autonomous exchange rate – more importantly, it also means having a central bank able to provide infinite liquidity to the banking system and support to the public debt issued in the local currency.

    Two key issues that in the Cypriot case may make the difference between staying afloat, even if with significant difficulties, or simply drowning – as may well happen under the current troika-sponsored plan.

  9. ottovbvs

    While the substance here is all broadly correct, it’s not a Eurozone fiasco it’s a Cypriot fiasco. What’s being missed by Mr Smith is that the destruction of the Cypriot offshore banking system was probably their principal goal. They don’t want a dangerously unstable and corrupt little hot money haven in the zone. The local elite, who liked all the opportunities it provided for graft, did them a huge favor by allowing this monster to inflate in size and ultimately blow itself up. It’s obvious the Cypriot economy is going to take an immense hit but I suspect the doom scenario is perhaps being overdone. If it became critical the Troika would probably pump in some aid since the sums are relatively small. Leaving the Euro is a mirage because if you leave the Euro the banking support deal goes too and the entire system collapses completely taking all depositors with it including those under 100k…it’s a package deal. And all these reinvention scenarios with the Cypriot pound don’t work either. To start with who is going to rush to put money into the “new” Cyprus hot money haven. Then to create the Costa del Cyprus (even assuming there is a market given it’s location and ambience) is going to require a massive inflow of goods and services all having to be purchased COD in 50% devalued pounds as is all the stuff required to feed, clothe, transport and house the regular Cypriots in the meantime. I’m afraid there are no get out of jail free cards.

    1. from Mexico

      ottovbvs says:

      They don’t want a dangerously unstable and corrupt little hot money haven in the zone.

      Well the eurocrats already have several of those, which cause them not a scintilla of consternation.

      So what made Cyprus different?

      Could it be that Cyprus cozied up too closely the Russians?

      It all goes back to what FDR said back in 1939 of Nicaragua’s dictator, “Somoza may be a son of a bitch, but he’s our son of a bitch.”

      1. ottovbvs

        Presumably you’re referring to places like Luxembourg, Monaco etc. The difference is that they’re not unstable, in fact most of them are essentially dominated by the major European banks. Cyprus was a loose cannon. Nothing to do with the Russians, some of the less greedy and more prudent of whom probably have loot stashed in these locations. With all due respect one of the problems with the Euro hating crowd is they’re over focussed on conspiracies and other myths. The reality is much more simple. One of the principal benefits of the Euro is the access it gives to cheap capital and credit for public and private investment. All the countries who have got into trouble have done so because they abused this opportunity in one way or another. There are some problems with the Euro model (eg. transfers) but they’re going to get ironed out. The political, economic, institutional and legal factors underpinning it are irresistible and once you’re a member those same factors make it irreversible.

        1. from Mexico

          ottovbvs says:

          One of the principal benefits of the Euro is the access it gives to cheap capital and credit for public and private investment. All the countries who have got into trouble have done so because they abused this opportunity in one way or another.

          When it comes to distorted and self-serving views, this is about as bad as it gets. Since Hugh did such a good job of batting back this sort of shameless and unabashed propaganda just a couple of days ago, I will defer to him:

          Countries like Germany and China can only run consistent trade surpluses if other countries are running trade deficits. This is almost always unsustainable as the Europe internal trade dominated by a mercantilist Germany and the US-China relationship illustrate.

          So the whole concept of competitiveness is irrational. All countries cannot run trade surpluses at the same time, and even those who manage to do so for a while do so at the cost of undermining their trade partners. That is the meaning of beggar thy neighbor.

          The two factors I see that tie exporting powerhouses like Germany and China together are currency manipulation and suppression of labor costs. Needless to say, these manifest in very different ways in these two countries. China starts with twenty million peasants entering the labor force each year. Wages are therefore easy to maintain at low levels. And the manipulation of the yuan we have known about for years. In Germany, wages are considerably higher but this does not mean they have not been suppressed. The Hartz reforms have, much like the Fed policies in the US, kept the wages of German workers flat to slowly falling increasing “competitiveness” but also allowing for the transfer of wealth gained from increases in “productivity” away from workers to Germany’s rich rentier class. As for currency manipulation, Germany’s adoption of the euro allowed it access to a cheaper currency than the mark, at once advantaging it and disadvantaging most of the other members of the eurozone. These other countries were saddled with a more expensive currency relative to their original national currencies, making them less competitive even as trade barriers between them and Germany were eliminated.

          We have been witnessing the unsustainability of the euro system for the last couple of years. We should recognize that competitiveness does not mean what most think it means. It has become nothing more than a cover for neoliberal policies aimed at suppressing workers’ rights and wages. Far from being a measure of economic strength of a society, competitiveness is an indicator of its weakness and the increasing subjugation of workers and theft of their labor. In exporting countries, workers are told to suck it up more to stay competitive. In importing countries, they are told they must suck it up even more so that their countries can be turned into exporting countries. But as I said, this isn’t possible or sustainable, and so beggar thy neighbor becomes everywhere beggar the worker.


          1. ottovbvs

            It’s not in the least distorted or self serving…just accurate. The lengthy piece you pasted…which when you strip away the bloviating about downtrodden peasants and the usual cast of villains…is essentially about the terms of trade, and does not alter Euro realities. Access to cheaper capital and credit is one of the major reasons why the remaining 8 members of the EU who have not adopted the single currency but are pledged to do so will almost certainly follow through in the next ten years. Yes the Euro project has a problem with cash transfers but these are going to get ironed out. Sorry if you’re hoping for the imminent demise of the Euro I wouldn’t hold your breath.

        2. Jim

          Ottovbus stated that: “There are some problems with the Euro model (e.g. transfers) but they’re going to be ironed out.” In a later comment he said: “The political, economic, institutional and legal functions underpinning it are irresistible…”

          But what if the political crisis in the European Union is only just beginning?

          What if the uncertainty about the political nature of the European Union (is it a State or is it a Federation) did not seem to matter in a period of relative economic prosperity but now becomes of utmost importance?

          And what if there has never been real political decisions taken by the by the majority of the populations of the EU as to the nature of this supposedly emerging political order?

          And what if, at the center of the European Union, there is really a political void, covered up by arbitrary bureaucratic economic rules and formal political procedures which never did protect or articulate the economic and political interests of the average European?

          And what if this type of depoliticization of the populations in the European Union (by economic and political technocrats)–is finally about to come to an end–in a genuine political struggle about the future political/economic foundations of the continent?

          If only the U.S. were so lucky!

          1. Yves Smith Post author


            Where do you get your information from? Seriously. The election in Italy IS a political crisis for the Eurozone. The German press understands that even if you don’t.

    2. carol

      Otto: “What’s being missed by Mr Smith…”

      Ms (!) Smith has missed nothing, please read a.o.:

      Otto: “They (Eurozone) don’t want a dangerously unstable and corrupt little hot money haven in the zone. ”

      re hot money haven, please read link above.

      Please remember too: Cyprus joined EU in 2004 and the eurozone in 2008. The ECB and Brussels knew very well what Cyprus was: a little island, divided, with 450% GDP banking sector in 2008. They allowed it to grow to 800%.
      And all of a sudden they take deposits of the islanders.

      Why do you think the Bank of Cyprus clients will be losing 77% instead of the originally (last week) mentioned 40%?
      It is because the Laiki and BoC have lost huge amounts of deposits: the foreign oligarchs have been allowed to use the open doors of branches in Russia and UK!!
      I.e. mission not accomplished!!

      1. ottovbvs

        Mr/Ms does it matter it’s the opinion were discussing not gender. As to whether it’s a tax haven, I just happen to know two people who have lived there to cut their tax bills. The responsibility for regulating their own banking system is a Cypriot one not a Eurozone one. Has some money seeped out out since the crisis hit? Probably. Is it material in the context of the amount of deposits in the entire system? No.

        1. carol

          Hi Otto,
          did you read the linked posting?
          2 people settling to reduce their taxes does not by definition make their new location a tax haven.

          If those 2 people moved from e.g. Sweden or the Netherlands (> 50% income tax for income above 50k / yr) then inevitably they reduced their taxes.

          Yes, Cypurs national bank was responsible.
          But ECB has provided Laiki bank with 9 billion loan, apparently against its own rules, as Laiki was insolvent. And now the ECB insists on the 9 billion being taken over the other problem bank.

          Apart from all that: why did eurozone accept Cyprus, as recently as in 2008?
          Do you think that if ECB, Brussels etc. had said to the Cypriots back then: ‘if you join the eurozone, this is what may happen’, that the people would have accepted the new currency?!

          Apparently we just disagree: having a pension deposit of 500 k, and losing 320 k instead of 160 k makes a huge difference.

          1. ottovbvs

            Er…with your example you just proved its a tax haven by my definition. Why the hell do you think all that hot money was sitting in the Cypriot banking system? Depending on who you believe 7-8 times Cypriot GDP. Conservatively that’s 175 billion dollars and an estimated 80% came from offshore. It’s there because one way or another it was receiving favorable tax treatment and/or a massive risk premium.

          2. Yves Smith Post author


            I’ve debunked that previously too. A tax haven is not the same as a low tax jurisdiction. You’re really abusing language here. You don’t get a right to private terminology any more than you do to making up facts. I wrote an entire post on that topic:


            As for your earlier comment that countries joined the EU to gain access to cheaper credit, that’s hogwash. The economic motivation was to facilitate trade .The Eurozone is a large economy and parties inside it are not subject to currency swings, which is a BIG business risk.

            The cheap credit has been destructive. Ambrose Evans-Pritchard has written about it repeatedly, how having the same base rate across the eurozone has been super destructive to economies like Spain and Ireland where a higher interest rate should have been in place given that their economies already had decent unemployment levels. The low interest was the reason for the housing bubble there and in Ireland.

        2. from Mexico

          ottovbvs says:

          As to whether it’s a tax haven, I just happen to know two people who have lived there to cut their tax bills.

          This is an excellent example of what is known as faulty deduction:

          Anecdotal evidence

          Discounting evidence arrived at by systematic search or testing in favor of a few firsthand stories.

          Example: “I’m going to carry on smoking. My grandfather smoke 40 a day and he lived until he was 90!”

          1. ottovbvs

            No it’s an excellent example of using an anecdote to illustrate a wider truth of why the Cypriot banking system is 7-8 times Cypriot GDP that is addressed in another comment of mine above which naturally you ignored. Pasting rather childish links like this isn’t going to make reality vanish.

          2. Yves Smith Post author


            You are earning troll points by engaging in ad hominem attacks. You are a newbie. Ad hominems are against house rules. Keep it up and you aren’t welcome.

            You have NOT responded adequately to the points made here. The plural of anecdote is not data. You examples do not prove your contention that low taxes were why Cyprus’s banking sector got to be so large.

            You really want to escape taxes? Come on. You go to Naura, Malta, Switzerland. the Isle of Man, the Caymans, or use a Wyoming limited liability company. If you can’t be bothered to read the archives here, go have a look at this:


            Cyprus is overwhelmingly used for investment in Russia, both by Russians and foreign nationals. Why? As I’ve explained repeatedly, its’ because Cyprus has English law courts. Cyprus is basically a back office for Russia. And if you are not Russian, you’d be irresponsible not to go through Russia. I’ve also known people dealing with other international investors (one on a real estate investment in Hyerabad when advising an Australian investor) to paper the deal up in Cyprus, again as waypost where everyone could meet and get the deal papered up by first world standards.

    3. Sleeper

      If Cyprus is a “Hot Zone” why not the Channel Islands or if we take a little bigger step why not the Caymans ?

      One thread of the ongoing financial / economic crisis is that any failure be ascribed to a moral failing.
      For example there are suggestions that the PIGS are doing poorly because they are corrupt and lazy, we are told that the housing crisis is due to dead beat borrowers and of course Cyprus is suffering from evil Russian money laundering.

      Please money is amoral it cares not one whit whether the currency is used to build cathedrals or is used to sustain mass murder.

    4. Yves Smith Post author

      I’ve repeatedly debunked the “corrupt” meme. Richard Smith even did an interntational Google frequency search on “tax haven” + Cyprus. The results show (effectively) no one searching on this prior to when Cyprus asked for its bailout (9 months ago) and a 45% rise since then. That’t the tell of a concerted PR effort.

      Look, why should the EU care about RUSSIAN money going in and out of Russia via Cyprus? This is a RUSSIAN issue.

      Cyprus is the place people go to invest in Russia, both Russians doing significant deals with other Russians, plus other countries investing in Russia. You’d be irresponsible if you were an international investor NOT to go through Cyprus.

      And the fact that a big % of Cyprus’ GDP was the result of being a back office to Russia was known when Cyprus was admitted to the Eurozone in 2004. It ALSO had an overlarge banking system relative to GDP then as well.

      All of this finger-pointing at Cyprus is to divert attention from the fact that Cyprus banks collapsed as a result of the implosion in Greece. This is a direct blowback. You’ve fallen hook, line and sinker for the Troika’s PR. The failure of austerity in Greece has considerably upped the cost of the Cyrprus “rescue” (the estimate I’ve seen for Laiki + the Bank of Cyprus is €10 billion).

      Now you can correctly criticize Cyprus for letting its banks get too big relative to its economy and not having really stringent oversight of their risk management and lending. If you are going to get that big, you need to be really conservative. Laiki was purchased by Gulf investors who then expanded in Greece. Oops.

      1. ottovbvs

        Apparently now your complaint is that the Cypriots made a dumb decision to invest in Greek bonds. This decision is NOT the fault of the Troika, it’s the fault of the people who decided to go for presumably higher yielding Greek bonds rather say US long dated paper.

        1. Yves Smith Post author

          Wow, you REALLY aren’t on top of this, are you?

          1. Buying US Treasuries would involve currency risk, or did you miss that somehow?

          2. The Greek bonds were eligible collateral at the ECB for loans under the ELA. That was the reason for preferring them.

          3. It was the ECB threatening to cut of Cypriot banks from the ELA that forced this crisis. This was manufactured, in other words. The ECB made periphery county bonds acceptable for financing as a back door funding mechanism. This is widely understood. They decided to lower the boom on Cyprus now for reasons that relate strongly to German elections.

    5. bmeisen

      ottovbvs is correct. I’m baffled by Yves’ complaints about wiping out the over 100k shareholders. This is exactly what should be done and exactly what should have been done in Sept 2008 at what became TBTF American banks. Yes the Cypriot economy will be wrecked by the collapse of most of its current economic model – and the model has been (dys)functional for about 10 years! An interesting post would sketch the argument that was used to bloat the economy after Cyprus got the Euro.

      1. Yves Smith Post author

        So tell me how any debt is going to be repaid if you crater the entire economy? This is Mellonite “liquidate the farmers” thinking that produced the Great Depression

        The problem with 2008 was not that the banks were saved, but that:

        1. The managements that drove them over the cliff were left in place

        2. No one was prosecuted or fined in a serious way

        3. The banks weren’t cut down to size

        4. The reforms were fig leaves and leave most of the bad practices in place.

  10. Jim Haygood

    ‘If they do this [freeze large commercial balances], there is little chance it can last more than a month — the economy will simply fail at even basic functions…’

    Consider, for instance, the local public utilities. Surely they use local banks, and have multi-millions on deposit for payrolls, capital spending, supplies, spare parts, etc.

    Wipe out most of their bank balances, and how are they going to keep the lights on, the water and gas flowing, the telephones operating, etc.?

    Presumably the Cyrpus gov’t will bail out essential utilities, but other large commercial entities are just FUBARed.

    To repeat: what part of ‘Greece needed two bailouts’ did the Cypriots not understand? Bailout II, comrades — it’s only a matter of time.

  11. F. Beard

    It should be obvious to most now (excluding MLTPB and other bank defenders) that risk-free fiat storage and transaction services should not be entrusted to those who lend what they do not have, the banks.

  12. The Dork of Cork.

    What do you think of UK income data from the rest of the world and what is the real significance of its massive decline (especially in Europe) ?

    Y2011 : £ 25,871 million
    Y2012 : £ 2,127 million

    remember these are not hyperinflated claims.
    This is the real yield from these hyperinflated claims.

    Remember in Q1 2008 its income yield from the rest of the world reached a record £14.1 billion.

    In my opinion the UK is choosing real goods over income from the rest of the world (especially Europe)

    This is a very big deal me thinks.

  13. Gil Gamesh

    Ahh, those Germans. We let them reunify and now they are creating open-air financial concentration camps in southern Europe. Mein kampf, indeed.

    1. scraping_by

      Actually, you can make a case for a Fourth Reich strategy.

      BH Lidell Hart, the interwar military commentator, noted the success of empires taking on weak states, either to knock them out of coalition or to build resource bases for larger scale attack. The point was indirect attack, with success leading to success.

      “In strategy the longest way round is often the shortest way there; a direct approach to the object exhausts the attacker and hardens the resistance by compression, whereas an indirect approach loosens the defender’s hold by upsetting his balance.”

      The use of a scam (speculative bubble -> bank failures -> ‘bailout’ with more debt -> debt to finance the debt -> a level of debt unpayable under any circumstances -> political control to supervise the unpayable debt) instead of an invasion is simply setting, not intention.

      It’s also important that the ECB isn’t a national entity but a business entity. And while one can go back and forth between governments controlling capitalists or capitalists giving the orders to government officials, in the end, it’s capture and control. IMF, ECB, World Bank, Fed, all the same.

    2. bmeisen

      You’re cutting the Leberkäs a little too thick, to put it politely. Germany is not monolithic. Successful reforms over the last 68 years have produced a functioning social democracy in which diverse political opinions find effective expression in the highest political structures, thanks in part to an electoral mechanism that allows minorities to participate in the executive. A ruling class, i.e. the rich, continue to enjoy disproportionate influence in decision-making processes, and the neoliberal flu has taken its toll over the last 20 years. The EU is hamstrung by the understandable hesitation of member states to give up sovereignty. In the European vacuum Germany is appropriately asserting itself.

  14. godwin

    This should kick off a nice wave of deflation. Cash in short supply=liquidation of assets to acquire much needed short term cash for necessities.

  15. Furzy Mouse

    A footnote – had lunch with friends who had just visited Cyprus for a couple of days, a few weeks ago, before the troika’s assault….said the port city seemed very poor, people looking to leave, to sell, but the economy – already moribund….

  16. allcoppedout

    It was possible to ‘guess’ if not strictly predict what Yves reveals in this post. The guess isn’t really from economics, debunked or otherwise. We just see bailout and collapse occurring in the same sequence. A hole is declared and it isn’t too deep and we are invited to fill it in as one might patch a pot hole. Stephen Hawking is at the bottom creating a black hole. This happens every time and the mainstream mejar report as though each incident is a ‘first’. What we discover in retrospect is that banks and institutions involved all passed stress tests that equate to letting students mark their own work – come an external exam the claimed learning turns out between a negative figure and 30% of the 100% claimed – some of which turns out to have been ‘nights on the tiles 101’.

    The key learning in Cyprus is that business can’t trust banks even to process payments as utilities – all some of us believe banks should be allowed to do. The next connection is that ordinary people find themselves wiped out paying to keep the Jabberwock fed.

    We may talk and do advanced regressions on capital controls, exchange rate fixes and 50 other measures in the play book – but to what end?
    Some group, whether in taking complex positions short on Cyprus and what comes next or incompetence, ‘decided’ to crush this tiny country. “The Germans” may be sick of pouring in good money after bad into the “Ponzi” – from communist China to the Irish tiger this always seems to be asset bubbles (farcically building or buying “homes” no one ever lives in)we fund through QE. What we can never organise is the kind of investment that raises standards of living and quality of life as accumulation of shared wealth in use, rather than the amassing of parasitic rent seeking (including that of being an imperialist manufacturer).

    All my experience with financial services (other than teaching P & L, balance sheet, cash flow and inventory basics) has been bad. My basic problem has always been wanting to treat bank charges and borrowing as costs to be minimised. Only certain aspects of human work and only ‘working people’ seem to have to conform to this basic company doctoring, global wage arbitrage, an economy of plastic crap, mega-fees for non-existent alpha …

    At a personal level I’ve paid (and recovered) punitive current account charges, ppi – been subject to fraudulent pitches to convert teaching pension to expensive ‘personal’ (yet just like everyone else’s)schemes (interestingly at the institution I worked in at this time the only suckers taught accounting – but 27,000 teachers were conned) and various ‘personal’ mortgage plans based on tax advantages in brackets I didn’t pay at the time. Burglary has generally been cheaper because I could insure against that. More professionally I have advised very good businesses to source internationally (screwing local production,jobs and raising fuel use in transportation), cut wages and staff, get out of manufacturing and into ‘more profitable’ retailing, knowledge service provision and the rest. With my experience in transfer pricing and other dodges in university research funding I should be working in Luxembourg or privatising a UK university to loot it in bankruptcy (reading Bill Black as a ‘how to manual’)! One of my former universities is in the middle of such a scam,

    Information and the pattern of its delivery to us on Cyprus could have been guessed so far (many of us suspected such) – but next week will take is into the unknown unknowns – expect a disaster movie – maybe the odd bankster swinging from a bridge. we will soon publicly know the trillions in financialisation can’t get healthy on looting this small economy. The Drake-Norrey expedition – an £80K joint stock venture – set out to destroy and plunder the Spanish after the Armada disaster. It failed, looting only £30 grand. “We” are looking at something similar – perhaps a financial flotilla plans to lay siege to Luxembourg, Singapore and that old pirate island, the UK? Maybe a modern Drake is already planning to seize German gold on its physical transfer from the US?
    Once PIGSILUKS are flying one can even imagine Gordon Brown sold Britain’s gold reserves knowing our boffins (traditional saviors against aggression from superior German manufacturing and technical education) have created bacteria that can produce gold from seawater in commercial quantities. The nano-particles produced in the lab are purple. Cyprus once had a purple standard – dye from its shellfish.
    To know who is next we need to know who is holding the lead balloons of bad financial ‘assets’ and who has the stuff that could fund the attacking flotilla. All we know from Cyprus is any laws of the innocent are suspended – these are Scots and predate Adam Smith.

  17. Hugh

    I am curious about what will be the fate of quislings like Anastasiades.

    I agree with carol that the EU and EZ knew but ignored well, pretty much everything, the shakiness of candidate states, bubbles being blown, over-geared banks, the weakness of the ECB, the dangers of having a monetary union without a fiscal and debt union, and trade distortions created by the new single currency. All these underline the fatal flaw in the European experiment. Everyone was a European on the upside of cheap credit fueling big bubbles but now that the bubbles have burst everyone is German, British, French, Greek, Spanish, Cypriot, etc. with this difference. The individual states are not reverting to their pre-euro currencies. Rather they are being forced both by the core and their own local elites to assume these “European” debts and losses on an individual state basis. And when I say “state” I mean also the 99%. Europe’s rich and elites created this never-ending and constantly worsening disaster, but it is still and everywhere Europe’s 99%s, divided against themselves, who are being both blamed and called upon to pay its costs.

  18. Serf Music

    This is what happens to countries that don’t have incredible leaders like Marshal Kim Jong Un, the brilliant commander of Mt. Paektu, to provide them with wisdom and guidance and unintentional comedy in times of great crises.

  19. Brooklin Bridge

    The fact that Cyprus has a decent-sized population of English retirees means that the British media will report on the Cyprus meltdown, which will be a stark contrast with Greece, where the economic devastation has not gotten the coverage it warrants.

    I don’t see that a large British population in Cyprus will automatically result in the media giving the coverage warranted to the economic devastation that the Troika has caused there.

    We have a large population of US citizens in the United States, yet there was barely a whisper in the main stream media about the extraordinary devastation that the mortgage fiasco caused nor about the subsequent complicity of the White House (resulting in a tectonic shift in the very meaning of ownership) in covering up the crime and protecting the criminal bankers. The tragedy and awesome human suffering has hardly received the coverage warranted. Why would the British media be any different?

    True, they will likely report on the meltdown, but in such a way as to make it seem that the citizens of Cyprus are a bunch of lazy gobment hand-out mooching dead beats who couldn’t tell the difference between a deficit (and all deficits will result in the end of the earth as we know it) and a restaurant menu. And as if they aren’t already deserving of what they get, they were in bed with a bunch of Russian Mafia types who were making a killing at capitalism, the dirty communists. (Granted, due to slight regional differences, I’m perhaps putting a slant on the exact wording they will choose…)

    1. Finnucane

      Sadly true, BB. Normal working people – “losers” – often cling to their illusion narratives more tenaciously than to their loved ones, to their prosperity, to their very pride. One may be tempted to see a kind of dignity in such tenacity – “my country right or wrong to the bitter end, against all enemies” and all that – until you realize that the illusion narrative at issue is informed by the crummiest, crudest resentment and bigotry.
      I have occasion to interact with many people who are in the process of attempting to get Social Security disability benefits. In my experience, it is a rule among that population that if you are white and middle-aged, then you have worked for and thus deserve disability benefits, while those other people are lazy moochers. Often, the first interaction with the applicant is marked by an announcement up-front that the gubmint is giving away our money to blacks and Mexicans who don’t deserve it – while I, in contrast, really need it and thus deserve it. It’s kind of funny at first, but it gets tiresome after a while. Sometimes makes one wish that the Martians would just go ahead and attack and get it over with.

      1. CB

        Have had recent experience of two such: “I’m a poor white man in a black man’s world.” The distant laughter I heard was the elites: everything going to plan and the old misdirection still working. The type will go to their graves, literally, wrapped around their self-immolating bigotries. And making my life worse.

    2. Yves Smith Post author

      No, you have this wrong.

      The bank abuses in the US reflected badly on the officialdom here. We have a controlled media in the US. Can’t have overmuch reporting of that.

      By contrast, the mess in Cyprus in no way reflects badly on the UK government or powerful interests. On top of that, there is a big Euroskeptic contingent (for instance, at the Torygraph) who are delighted to report on the flaws of the Eurozone.

      And a lof of the retirees in Cyprus are apparently ex RAF. RAF pensions don’t allow them to buy real estate in the bubbled-up UK, and many of them were stationed in Cyprus and took a shine to it.

      1. The Dork of Cork.

        The Telegraph is Hobbit fodder.

        It does not make British foreign policy.

        This may come as a surprise to most people but the UK is geographically part of Europe , it remains a member of the EU , it is a large shareholder of the IMF………

        British European physical trade is a mirror image of Euro trade.

        1. Yves Smith Post author

          You’ve just changed topics. I’m talking about media coverage. There’s no political embarrassment to the UK in reporting what the Troika did to Cyprus. The BBC is reporting it just as much as the Torygraph, but the Euroskeptics, who are a pretty significant contingent in the US and ALSO include some prominent writers at the Financial Times are also feeling more than a bit vindicated by what is going on.

          1. The Dork of Cork.

            So what ?

            I love listening to BBC radio 4 but know its a fiction.

            The simple fact is that the UK is integrated with Europe.

            In terms of physical trade dynamics the UK is EUROPE…..just add the Asian spice to the mix.

            The fiction is well………..a good read.

      2. Brooklin Bridge

        Of course I hope you’re right. And indeed, my example wasn’t fair (anything to get in a swipe at our media :-)). Still, the looting phenomenon going on in Cyprus is global in nature and so are the interests of the Troika. I find it hard to believe the British press is not part of that. The views of people (including family) I know in Great Britain correspond incredibly closely to the same myths that get squeezed out of the media meat grinder over here.

  20. JTFaraday

    “And it would be very difficult for a business of meaningful size not to have over €100,000 in deposits. If you freeze a significant majority of the commercial balances, how can you operate?”

    So, what’s the bottom line here? That real Cypriot businesses lost their deposits because “someone” speculated in Greek debt? And who is this “someone”?

    We seem to want someone to be held responsible, but a lot of the time, the way these stories are written, there are no actors. Everything is hidden under layers and layers of bureaucracy in multiple sectors, dispersing responsibility so that effectively “no one” is responsible, or else depositing responsibility where it doesn’t belong, like the German public for its attitude problem.

    Or even, for that matter, Angela Merkel for not throwing money at her problems like the ever sagacious Tim Geithner. Although that does have the advantage of obscuring his problems a little better, I must admit. A much better front man to be sure.

    Or else it’s attributed to some dead economist, which I also think is bullsh*t.

    So, if I’m a Cypriot businessperson and I want the right person’s head on a platter, who just robbed me?

    (Yes, I know I should have dispersed my deposits so that I couldn’t be held responsible instead of the responsible party–spank me!).

    1. Yves Smith Post author

      I’ve written on this before.

      Laiki was purchased by Gulf interests and set up a lot of branches in Greece. The Laiki failure is direct blowback from the slow motion collapse in Greece.

  21. Rupert

    It looks like Cyprus can at least count on continued support from some progressives in Spain. Moratinos the former finance minister describes the pounding of Cyprus as in part punishment for the audacity of the citizens of this small island to say no to the Annan plan conceptualized by the US, Berlin and Brussels, and which practically aimed to legalize the occupation of the Northern part of Cyprus by Turkey.

    Sorry I’ve not translated it:

  22. The Dork of Cork.

    I don’t think people get the scale of crisis in British trade , in particular energy & finished industrial goods.

    This is a zero sum game.

    For the UK to survive it must burn the colonies.

    British trade ( fuels) surplus / deficit.
    Y2000 : £ + 7,041 million (peak)

    Y2003 : £ + 4,262 million

    Y2012 : £ – 21,624 million

    Thats a swing of over £28 billion !!!!!

    It must get fuel from outside its political (but not economic) hinterland which means less for us Euro commies.

    1. tiebie66

      My personal view is that the root of every economic transaction is essentially a de facto ‘barter’, that is, an exchange of goods (& services) for goods (& services). Promissory notes (fiat) simply allow flexibility in this exchange. Thus I always view your motto, perceived to be: “follow the goods, especially the energy”, with interest.

      Many of your comments seem to suggest that goods are extracted from other regions in exchange for ‘promissory notes’, rather than for other goods. Thus the deficit countries are the real ‘villains’ because they exploit the trade surplus countries as offshore factories.

      However, this extraction cannot occur indefinitely because at some point the promises will be perceived as empty. When it ends, those countries with expertise and infrastructure will be better off. Therefore extractive economies are self-destructive, no? It seems that eternal competitiveness is the price of survival.

  23. The Dork of Cork.

    British trade deficit , total goods.

    Y1998 : £ 21,813 million
    Y2012 : £106,614 million or -6.9 % of GDP

    Hello ???????
    Thats nearly 5 times as much as it was back in 1998 !!!!!

    Something is just not right with global & intra European trade.

    Its real goods trade deficit with Germany is £ -20,328 million
    It was £ – 17,893 in Y2011.
    So its deficit with Germany is increasing.

    Martin Wolf talks about the need to rebalance.

    Where the fuck is the balance !!!!!!!!!!

    When you look at real goods you can see quite clearly the Eurozone is a plaything of the UK & France.

    To sustain this imbalance people in other countries must be burned – its as simple as that.

  24. mkexplorer

    Egad! How could this possibly be better than a broad bank recapitalization (and perhaps nationalization) would have been? For those railing against moral hazard, I suppose the catastrophic collapse of the Cypriot economy, and its resultant human suffering, is just what the doctor ordered. What these finger-waggers don’t understand, however, is that the lessons learned by the Italians, Spaniards, Greeks, and Portuguese may be very different from what the Troika intended.

    I suppose the only potentially comforting thought here is that the country being made an example of has a comparatively small population, so that only thousands, rather than millions, are made to suffer in order to warn the rest of the Eurozone of the Troika’s folly.

  25. steve from virginia

    The Troika has smashed the Cypriots for small reasons and big consequences. European confidence has just flown out the window.

    – Nothing different in Cypriot economy for the past five years. If there was a money-laundering problem, where were the authorities? Arrests? Prosecutions? Due process? Even if there was money being laundered, how is this the fault of the ordinary Cypriot?

    – Cypriots were disserved by their worthless, inept government. The Communists were able to stall the Troika for months, the new ‘conservative’ dudes did not even last a week. Were there payoffs?

    A: probably.

    – The managers of BoC and Laiki were crooks who failed. Again, how is this the fault of the citizens? Where is the prosecution?

    – An investigation would reveal the relationship between the Greek government, Cyprus banks, the central banks of both Greece and Cyprus and the business surrounding the billions in Greek bonds bought by the Cyprus banks. The ECB is the responsible party RE those bonds … or criminally negligent. The whole scheme has the characteristics of a Goldman-Sachs ‘pump-and-dump’ deal, something Draghi would understand. It’s a good bet that a forensic audit of those bond deals would prove very embarrassing for Mr. Draghi … better ammunition for the Cypriots than their own currency or begging bowls.

    – From the ‘Troika is lucky’ department: arrest IMF personnel at the airport and throw them into dungeons, charge them with crimes, promise the death penalty (I know there is no death penalty in the EU, the IMF is stupid they don’t know that). Some of those old castles on Cyprus certainly have dungeons. Some piped in screaming 24 hours a day would be appropriate along with the one thin blanket and the bread and water ‘meals’. Not EU or ECB personnel, they can stay in hotels, jail the non-European interlopers. Split the Troika, hold the IMFers for ransom. How about $10 billion?

    – The Cypriots ought to dollarize: convert all euro deposits into dollars, make the swap outside the European market, offer CDs to those who might be interested and leverage them to bail out the bank depositors w/ dollars as much as possible. Sweetener: a lease on a nice, new US Navy base.

  26. ottovbvs

    “Ahh, those Germans. We let them reunify and now they are creating open-air financial concentration camps in southern Europe. Mein kampf, indeed.”

    Unfortunately, for a blog that’s supposed to be about economics, the currency here is not Euros or Dollars it’s emotionalism. Often of a somewhat hysterical cast as in the example I’ve cited. It’s hard to believe it’s not supposed to be a satire but joke or genuine it’s difficult to distinguish from much of the other stuff. Krugman often points out (although he doesn’t take his own advice) that economics is not a morality play. This is a reality that needs to be taken on board by more than a few posters.

    1. Yves Smith Post author

      You’ve also got that wrong. Economics is most decidedly about morality. And you are as guilty as anyone. You’ve been hectoring the Cypriots (while conveniently blaming everyone there for the failings of selected businessmen and leaders) for their alleged irresponsibility while not even being accurate about the role of their international banking sector.

      One of the underlying assumptions in economics that is at the root of debates but is seldom made explicit is what the policy priority should be: efficiency or fairness? The “free market” ideology pretends you get both when you can’t. Only the big and strong can get their rights enforced in a highly efficient system (one with low frictions, meaning regulations). And a highly efficient system is unstable (I’ve written at length on this in ECONNED).

      Krugman is being completely disingenuous in saying economics is not about morality.

    2. Lambert Strether

      Well, no, economics is not a “play,” given that it has lethal real world consequences. Many people consider matters of life and death a question best answered by taking morality into account. YMMV. And apparently does, along with Krugman’s.

    3. Hugh

      Economics divorced from its social purpose, that is building a society its members wish to live in, is nothing more than intellectual masturbation and cover for looters in three piece suits.

      The economy is not some force of nature or act of God. It is a human enterprise created for human reasons to serve human needs. The rich and elites want us in the 99% to forget this fundamental relationship. The economy is not there to serve their needs. It is there to serve ours. When you say that economics is not a morality play, you are parroting the propaganda of the looters, you know the people who drove the economy over the cliff in 2008 and are busily setting the stage for a repeat.

      Invoking Krugman does not win a lot of points around here. He is an Establishment liberal and Democratic tribalist. He is Keynesian but remains firmly in the neoclassical camp. As such, he has no real understanding of money, banking, or debt in economics. Politically, his allegiance is to the elites of which he is a distinguished member and a corrupt, corporatist Democratic party.

  27. Paul Niemi

    I wrote here some days ago that it looked to me like the Cyprus banks were paying too much for deposits, in effect they were “in competition with Bernie Madoff.” Now I read the payoffs to people near the top of the pyramid included writing off of generous loans to local pols and wheels. I am not saying this has anything to do with the so called “global Ponzi.” It has to do with the collapse of a specific, local Ponzi-type construction. It is ironic that Cyprus aimed for an economy with very low taxes and low regulation, an experiment we could associate with some libertarian ideals. However, whether planned or not in the beginning, the government and the larger two banks eventually operated much like pyramid scheme, it seems. It is kind of hard to see the collapse of the banks as an inevitable collapse, when we are all taking turns being outraged at all the other players tangentially involved. Me, I can’t blame Finland and the Netherlands for wanting collateral to loan money to Cyprus, given what we already know.

  28. Eric

    Yves, or anybody,

    Off the subject a little, but what do you think are the most likely events that will cause terminal damage to the EZ in its present form, if its not already terminally damaged?

    My guess is that unless Italy gets a pro EU government put in place by the Eurocrats, then Beppe Grillo has a very good chance of winning the next election. If he does then Italy will default. Would this cause a collapse of the EZ banks and irreversible domino effects throughout the EZ?

    What stage does the austerity packages damage the economies of Spain, Italy soon to be France to a point where social unrest takes them out of the EZ?

  29. bluffraise

    The digital age Corsairs are here. In Cyprus they have shown their hand. The race for real assets with yield is on.

  30. duggie73

    …on your cheaper credit point.
    A teaser rate isn’t a real advantage for the borrower, it’s a sales technique.

  31. Justin Bowles


    Something you don’t touch on is the Balance of Payments position. They have a structural trade deficit of €3 billion ish. Their energy import bill alone is bigger than total merchandise exports! Up to now, the balance of payments have balanced through financial services and capital account inflows: both look toast.

    It is difficult to know where to start in re-balancing this economy. With the financial services industry destroyed I can’t see how they will pay for even bare essentials like food and energy. And exiting the euro won’t help with that one.

    I have some charts on my site and have had a closer look at the Bank of Cyprus’ balance sheet as well:

  32. Roger Erickson

    Wow. Great discussion here. Too many things to address, so I’ll just start with one:

    “Europe’s rich and elites created this never-ending and constantly worsening disaster, but it is still and everywhere Europe’s 99%s, divided against themselves, who are being both blamed and called upon to pay its costs.”

    Response? – Sane People Can Always Take Back Their Own Fiat

    and end with another:

    Cyprus banks were … “in competition with Bernie Madoff.”

    Response? Taking back public fiat requires adequate regulatory methods. Goals trigger methods, which drive results.

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